There is good news. The agreement on the rapprochement between the United Kingdom and the European Union is excellent news.
Since June 23, 2016 and the Brexit referendum, the entire continent has been wobbly.
Brexit was probably not the best idea. It’s a good thing that we’re collectively reconsidering it. But this rapprochement is also a consequence of the shift in the balance of the global economy.
During the Brexit vote, British supporters of leaving the EU were banking on an open world. They highlighted the Commonwealth network and the ability to forge agreements worldwide. There were some doubts, but the idea could make sense in a very open world.
However, even back then, most economists were promoting the model of international trade based on geographical proximity. In other words, a country trades primarily with its neighbors if they have a similar level of development. Based on this model, which works well, and not just with Great Britain, economists feared a relative decline in the United Kingdom.
Nearly 10 years after the referendum and five years after the United Kingdom’s effective exit from the EU, the world has also changed. It is no longer as open; it is tending to become more regionalized. We are moving closer to a free-for-all than to the cooperative model that accompanied globalization. Defining a collective interest makes sense.
For the British, the Europeans are their natural allies. The first agreement just signed between London and Brussels does not close the gap, but it does give Europe greater coherence.
The second observation is that the Brexit disruption disrupted much of the cycle’s dynamics for the British. European economies are fairly well integrated, and their cyclical profiles are comparable. One country’s momentum benefits everyone by extension.
By severing ties with the EU, the British lost access to this integrated dynamic. This had three consequences: the investment rate of British companies is low, and Brexit has tended to weigh heavily. Foreign companies’ interest has also been reduced due to an insufficiently large market. The migratory flow of Europeans has reversed, causing a reduction in human capital. The final element is poor productivity. One consequence of these three phenomena is a large public deficit and rapidly growing public debt.
The United Kingdom is stuck in a model that lacks effectiveness. Its rapprochement with the EU will allow it to regain momentum that has faltered. The British feel somewhat alone and unlikely to make up for lost ground on their own.
Rapprochement with the EU is the right solution to restore coherence to Europe and the touch of madness that it lacked.